One of retailing’s hottest new technology tools isn’t for every merchant.
A survey of 18 retailers that implemented the software, known as markdown optimization, concluded that not all stores should use it. Less than 50 percent of the retailers were able to quantify a return on investment. However, those that could calculate sums reported margin gains of 2 to 3 points and a majority believed the technology benefited the bottom line.
The study concluded that retailers generating the most ROI from markdown optimization systems were selling fast-turn, short-life-cycle products, and operating a promotional strategy built around markdowns that were specific to items or clusters of stores with similar performances on the items. They also had a disposition for embracing analytics. Almost half the companies surveyed had 100 percent of their merchandise incorporated in the markdown optimization initiative.
“If you look at markdown optimization as a technology strategy, you are not going to be very successful,” said Antony Karabus, founder and chief executive officer of Karabus Management, a Toronto-based retail consulting firm that has implemented the software and related coaching at 12 retail companies including 10 in the U.S. “It has to also be part of your marketing strategy and embraced by those working on the selling floors.”
Among those participating in the survey were American Eagle Outfitters, The Northern Group Retail, Bloomingdale’s, Casual Male, Ann Taylor, Nordstrom, Loehmann’s, J.C. Penney and Gap. Oracle and SAS are among the handful of suppliers of markdown optimization. Oracle in 2005 bought ProfitLogic, which pioneered a software suite for merchandise optimization including markdowns.
Seeking to learn how much value retailers were getting from markdown optimization, Karabus commissioned the Bloom Group, a research firm, to conduct the survey. The study is timely considering that the technology has been gathering steam since being introduced in 2001.
Pricing used to be done more by gut instinct, when retailers could be involved in all aspects of their businesses. But many retailers have expanded to different regions and climates, making it difficult to determine when and by how much merchandise in each store should be marked down.
The survey’s results also coincide with next week’s National Retail Federation expo and convention at the Jacob K. Javits Center in Manhattan, which attracts about 30,000 retailers and suppliers and promotes emerging retail technologies. It’s also clearance time at retail, so markdown systems are in full gear.
Karabus said about two-dozen retail companies in North America have implemented markdown optimization that has had an impact on several merchandise categories or are chainwide. Typically, the installation process takes 20 weeks or so, and costs, including hands-on coaching and software training, range from $3 million to $5 million or more, depending on the size of the company, Karabus said. “It’s not cheap, but the payback can be incredible.”
The survey found that seven retailers could quantify the technology’s impact on gross margin; eight perceived benefits but were unable to quantify them, and three saw little or no benefit. The results depend on the character and culture of the company and its product lines. Replenishment systems are more worthwhile for businesses selling more basic merchandise with long shelf lives.
However, “If the life cycle of product is 10 to 16 weeks, that is the sweet spot,” Karabus said. “If you’re selling predictable, slow-turning stuff, what do you need optimization for?”
The system has been successful at chains such as American Eagle, Bloomingdale’s and Northern Group. Every Monday morning, it could be a planner, buyer or pricing analyst who receives markdown recommendations via computer on the items for which they are responsible. “They can accept the markdown recommendation, reject it or modify it,” Karabus said. “The trick is to take the markdowns when there is still demand on the upward curve of the life cycle of the item. That’s counterintuitive. But you want to extend the peak demand before it starts waning.”